When it Comes to Understanding Financial Statements, We’ve Got the Key
For every business owner, understanding your financial statement is a necessity. And if you’re like many people, financial statements can look like a headache.
Let’s get to grips with financial statements and get an understanding of balance sheets and income statements.
What is a financial statement?
Financial statements are accounting reports that summarize a business’ activities over a period. Overall, they provide the business lenders, investors, and creditors with an idea of the business's financial health, financial performance, operations, and cash flow. They provide key information about the company’s revenue, expenses, profitability, and debt.
Often financial statements are used to ensure accuracy for purposes of tax, financing, or investing. Financial statements are useful if you’re looking for investors, or if you want to apply for credit.
There are different types of financial statements – typically they are the balance sheet, the income statement, the cash flow statement, and the statement of the owner’s equity.
Let’s explore exactly how they work. Firstly, the one key thing to get your head around is:
What the business owns is equal to what the business owes.
A business owns assets, and a business owes liabilities to third parties and equity to those who own the business.
In other words, assets = liabilities + equity. This is known as the accounting equation. Once you’ve grasped this, you’re well on your way to understanding financial statements.
Balance sheets and income statements
The equal sign that we mentioned above is important because you must remember that the assets must always balance liabilities and equity. When you look at a business’ accounting equation at a particular point in time, this is known as a balance sheet. It’s like a snapshot of the business’ assets, liabilities, and equity. This is a summary of what the business owes and owns on a certain date.
Now for the income statement. To understand this, we need to know that equity is made up of capital contributions (the cash or assets invested into a business by an owner in exchange for a share of equity). The income statement summarises the business’ revenues and expenses over a period.
We also need to understand the business’ retained earnings (the business’ accumulated profits that they hold onto for the future.) It’s what is left over after the business has added up all the profit that the business has generated and takes away what has been withdrawn by the owners. Retained earnings are made up of opening retained earnings plus current-year profits minus current-year withdrawals.
Opening the door to your financial success
As a business owner, you’ve invested heavily in the company and deserve a good rate of return. Trust us - some basic knowledge of tax and financial compliance goes a long way, helping you to open doors to a successful future.
As your business advisors, we are here to guide you. You can talk to us about the often complex world of business strategy, tax management, accountancy, and financial advice. We specialize in everything from basic compliance to business advisory services, and from advanced tax planning to business exit planning.
When looking towards the future direction of your business it’s important to have an expert to advise you. We partner with companies to establish long-term rewarding business relationships. Let’s sit down together at a free strategy session to discuss your financial goals.